NUA Strategy: How to Slash Taxes on Your 401(k) Company Stock
NUA Strategy: How to Slash Taxes on Your 401(k) Company Stock
EXECUTIVE SUMMARY
- The Opportunity: If you hold highly appreciated company stock inside your 401(k), rolling it over to an IRA is a mistake. The IRS allows you to use Net Unrealized Appreciation (NUA) to treat the growth as Capital Gains (max 20%) rather than Ordinary Income (max 37%).
- Authority Baseline: This analysis follows the “Lump-Sum Distribution” rules outlined in IRC ยง 402(e)(4)(B), which require the entire account balance to be distributed within a single tax year.
- Scope Limitation: This applies strictly to employer securities held in a qualified plan; mutual funds or ETFs inside the 401(k) do not qualify.
- Anti-Exaggeration: NUA is not always the winner. If your cost basis is high (i.e., the stock hasn’t grown much), the immediate tax bill on the basis might outweigh the future tax savings.
Standard advice says “Rollover everything to an IRA.” For most assets, this is correct. But for company stock, it is a $100,000 mistake. When you move stock to an IRA, you convert future withdrawals into high-tax Ordinary Income. NUA preserves the low-tax Capital Gains character of your stock’s growth. According to Team BMT Analysis, this is the single most overlooked tax break for corporate executives and long-term employees. Source: IRS Tax Topic 412 (Lump-Sum Distributions)
Scenario: You have $1M in Company Stock in your 401(k). Cost Basis: $100k. Growth: $900k.
- Option A (Rollover to IRA):
You move $1M to an IRA.
Future Tax: You pay 37% Ordinary Income tax on the full $1M as you withdraw it.
Total Tax Liability: $370,000. - Option B (NUA Strategy):
You distribute the stock to a Taxable Brokerage account.
Immediate Tax: You pay 37% on the Cost Basis ($100k) only = $37,000.
Future Tax: You pay 20% Capital Gains on the Growth ($900k) = $180,000.
Total Tax Liability: $217,000. - Verdict: You saved $153,000 by using NUA.
Tax Rate Comparison
| Strategy | Estimated Tax Bill |
|---|---|
| Standard IRA Rollover | 370000 |
| NUA Election | 217000 |
*Chart Note: The massive gap between Ordinary Income rates (Top 37%) and Long-Term Capital Gains rates (Top 20%) creates the arbitrage. NUA locks in the lower rate for the appreciation.
CRITICAL SCENARIO: The “Trigger” Failure
One wrong move kills the strategy.
| Mistake | Consequence |
|---|---|
| Partial Rollover (Leaving $1 in the plan) | Disqualification. NUA requires a “Lump Sum Distribution” of the entire balance in one tax year. |
| Rolling Stock to IRA First | Irreversible Error. Once the stock hits the IRA, the NUA basis is wiped out forever. |
Execution Protocol
You generally need a qualifying event: Separation from Service, Age 59ยฝ, Disability, or Death.
Decision Order: Confirm Trigger โ Calculate Basis vs. Market Value โ Check Liquidity for Tax Bill.
Direct the Company Stock to a Taxable Brokerage Account (In-Kind Transfer). Direct the Non-Stock Assets (Mutual Funds/Cash) to a Rollover IRA. This splits the tax treatment.
You will owe ordinary income tax on the Cost Basis (the original purchase price) in the year of distribution. Ensure you have cash outside the account to pay this, or you’ll have to sell some stock immediately.
Fail Condition: If the Cost Basis is too high (e.g., stock is only up 10%), paying tax now isn’t worth it. Rule of thumb: Appreciation should be at least 2-3x the Basis.
WEALTH STRATEGY DIRECTIVE
- Do This: Check your 401(k) statement for “Cost Basis” of employer stock. If the “NUA Amount” (Market Value – Cost Basis) is substantial, consult a CPA before retiring.
- Avoid This: blindly checking the “Rollover to IRA” box on your exit paperwork. Once the stock leaves the plan into an IRA, the NUA option is gone forever.
Frequently Asked Questions
Can I do NUA on just some stock?
Yes. You can pick and choose which tax lots (usually the lowest cost basis ones) to apply NUA to, and roll the rest (high cost basis) to an IRA. This is “Cherry-Picking.”
Does the 10% penalty apply?
If you are under 59ยฝ (and left service before 55), the 10% penalty applies only to the Cost Basis portion, not the NUA growth portion. See Rule of 55 (#302).
What if the stock drops later?
You still owe tax on the original Cost Basis. However, you haven’t paid tax on the NUA part yet (only when you sell). So the risk is limited to the tax paid on the basis.